Inflationary effects of oil price shocks in Indian economy

Abstract

Stabilising inflation around certain preconceived level remains the predominant objective of monetary authorities all over the world as its variability has crucial ramifications on the real economy. However, the effective operation of monetary policy to this end largely hinges on the nature and dynamics of inflation both in the short‐run and long‐run. In this context, the present study focuses on theoretical investigation of how crude oil price fluctuations affect inflation in a real economy. Moreover, the study examines the nature of relationship between crude oil price fluctuations and inflation and its impact with reference to Indian economy.The study suggest that, in India, although the price of petroleum products are insulated against international crude oil price fluctuations by way of subsidies in order to curb inflation, in the long run, inflation manifest itself in the form of worsening fiscal deficit and undermine the sustainability of public debt. Copyright © 2016 John Wiley & Sons, Ltd.